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GST to have short-lived impact on inflation: RBI
October, 06th 2016

Implementation of GST will have a short-lived impact on inflation, the Reserve Bank said on Tuesday while endorsing a government panel report that suggested 18% indirect tax rate to keep the impact on prices minimal.

In its 'Monetary Policy Report', RBI said cross country experience suggests that the pass-through of the Goods and Services Tax (GST) will likely commence from April 2017 and last for about 12-18 months. It said: "While the creation of a unified goods and services market would reduce supply chain rigidities, cut down on transportation costs and also bring down costs in general through improvements in productivity, it could also produce a short-lived pass-through to the inflation trajectory." While the impact of GST on CPI inflation would largely depend on the standard rate decided by the GST Council, almost 50% of the CPI is expected to be exempt.

"Cross-country experience indicates that the GST implementation might have one-off effects, which tend to dissipate after a year of its implementation," RBI said.

Endorsing Finance Ministry's report on GST structure, RBI said the dual rate GST structure with a standard rate of 18% and a low rate of 12% (consistent with a revenue neutral rate (RNR) of about 15-15.5%) is expected to have a minimal impact on inflation. If the standard rate is increased to 22% (with an RNR of 17-18%), the impact on aggregate inflation would be in the range of 0.3-0.7%, concentrated in select groups like healthcare (excluding medicines).

As the standard rate increases from 22% to 26% and 30%, the impact on CPI would increase from 0.6-1.3% and to 1.0-1.9% (with input tax credit), respectively.

"The general consensus is that the impact on consumer price inflation is likely to be moderate if the standard GST rate is at 18% in fact, overall price levels may go down due to more efficient allocation of factors of production," it said mentioning an NCAER report.

Over the medium-term, RBI said the implementation of the GST should boost business confidence and investment, brightening the environment for an acceleration of growth. Touted as the biggest tax reform since independence, the GST will subsume excise, service tax and other local levies.

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